A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment company in the UK.
What affects the performance of a mutual fund?
Each mutual fund scheme has an investment objective and is managed by a designated fund manager, who is responsible for the optimal performance of the fund to achieve that objective.
This performance is influenced by decisions made by the fund’s management team, as well as market twists and turns, both equity and debt. Typically, all fund management teams have a process in place that dictates the choice of stocks in the portfolio. And it is the performance of these securities, in different market conditions, that finally dictates the performance of the scheme.
Fund management teams do their best to make the right decisions based on price, quality, risk, finances, news flows and economic developments. A team that possesses solid skills, strong processes and relevant experience is bound to do well.
However, it is important to measure performance against realistic time horizons: long-term for equity funds, medium-term for hybrid funds or very short-term for liquid funds.